Telecom's new buy needs time to pay

By BRIAN FALLOW

WELLINGTON - Telecom expects to wait two or three years before its newly acquired Australian subsidiary, AAPT, starts earning its keep in terms of the group's bottom line.

Chief financial officer Jeff White said that the boost to Telecom's earnings from its 81 per cent share of AAPT's profits would not cover the two negative factors - the interest on the $1.56 billion cost of the acquisition, and the writeoff goodwill at $64 million a year over 20 years.

Telecom's earnings per share would be lower than they would have been without AAPT for three or four years, including the goodwill writeoff, or for two or three years without it.

Chief executive Theresa Gattung said the acquisition would add significant shareholder value in the foreseeable future.

"It is primarily about repositioning ourselves as a growth stock and a growth story," she said. "It is about getting a share of the growth in the Australian market, which is a bigger and faster-growing market than New Zealand."

Although Telecom had ended up with more of AAPT than it sought, she said it was very pleased with the price paid.

AAPT has hundreds of millions of dollars worth of capital expenditure to carry out over the next few years. Options for funding that development include a listing on the Nasdaq exchange or private placements with institutional investors.

"We would not be uncomfortable if our stake was diluted in the pre-audit," Ms Gattung said.

Telecom yesterday reported net earnings of $209 million for the September quarter, up 1.5 per cent on the same period last year and slightly below analysts' forecasts, which were clustered in the $212 to $216 million range.

Earnings were trimmed by $7 million in funding costs for the 20 per cent of AAPT Telecom already held by balance date, and a further $3 million in losses from the Southern Cross transpacific cable still being rolled out.

Otherwise, earnings would have been up 4.9 per cent on a year ago.

The result continues the pattern of strong growth in the cellular, data and internet businesses, while the traditional "commoditised" businesses such as national and international tolls suffer declining margins.

The total tolls margin fell $24 million, or 16.8 per cent, from a year ago.

Had it not been for that decline, which Telecom expects to continue but diminish, overall earnings before interest and tax would have been up 8 per cent instead of the 1.7 per cent recorded.

The quarter was notable for a 50 per cent increase in cellular customers from 504,000 to 760,000.

But associated costs such as subsidised handsets for prepaid cellphone deals provided the main upward pressure on operating expenses, which grew 2.4 per cent while revenues increased 2.1 per cent.

Earnings per share increased 1.4 per cent to 11.9c, of which 96 per cent will be paid out in an unchanged dividend of 11.5c on December 15.